Turkish Lira Weakens as Rally Driven by Poll Verdict Fizzles Out

  • 10-year government bond yield climbs most in more than 2 mos.
  • Sabanci Holding the biggest contributor to equity index's loss

Turkey’s lira declined as investors sought to benefit from the biggest jump since 2008 after AK Party’s weekend election win. Turkish stocks and bonds also fell.

The currency retreated 0.5 percent to 2.8393 against the dollar at 5:50 p.m. in Istanbul, after rising as much as 0.5 percent. The Borsa Istanbul 100 Index declined and the yield on the government’s 10-year bonds jumped the most since August.

Turkish assets soared on Monday after the AK Party, which President Recep Tayyip Erdogan co-founded, swept back into office in the second vote this year, ending months of political deadlock. While investors welcomed the end to the stand-off, focus shifted to who will be part of the government’s economic administration. The win extends AK Party’s 13-year rule and may reignite the debate over constitutional changes that would lead to a government run by the president. Erdogan’s critics say he is already exerting too much influence.

The AK Party plans to alter the central bank’s structure, including the regulator’s monetary policy committee, pro-government Sabah newspaper said, without citing anyone. Pressure from politicians to keep interest rates low has helped weaken the lira, which fell to a record this year.

“The lira strengthened too fast yesterday after election results and some kind of balancing in the lira was expected," said Burcin Metin, the head of currency trading at ING Bank in Istanbul. "But the story about AK Party’s possible plans to change the central bank structure has accelerated the balancing move."

Stocks Drop

The Borsa 100 lost 0.9 percent at the close led by a 3.1 percent drop in Haci Omer Sabanci Holding AS. The banking index, which climbed the most in more than two years on Monday, fell 1.4 percent.

Lenders were the biggest contributors to the Borsa 100’s gains after the vote, helping to send the gauge’s 14-day relative strength index to 72, the highest in more than nine months. A level above 70 is a sign to some investors that a security is overbought. It declined to 68 on Tuesday.

The yield on Turkey’s 10-year debt rose 27 basis points to 9.66 percent.

The central bank’s independence is critical to maintain the flow of foreign funds into Turkey, and would help support a rally in the lira, according to William Jackson, a London-based emerging-market economist at Capital Economics. “But without this, I think the lira may start to fall again,” he said.

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